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The exports and imports of a country should be roughly equal in value, since the foreign exchange earned by exports is necessary to finance imports, but such a balance is rarely achieved. This is and thus an exact balance can never be reached, but is also due to fluctuations in markets leading to changes in import and export values over a period of years. The difference in value between imports and exports is referred to as the balance of trade. If exports exceed imports a country is said to have a. favourable balance of trade, while if imports exceed exports it has an adverse balance of trade. These terms are relics of an earlier trading era, when if a country exported goods in large quantities they were paid for in gold. Thus, an excess of exports brought an addition to gold reserves. A country which has consistent adverse balance of trade, as Britain has done for more than a century, can enjoy great prosperity, while a favourable balance of trade is often characteristic of underdeveloped countries today, which often have great financial difficulties notwithstanding.
The balance of trade only takes account of visible trade or the value of actual goods transferred from one country to another. But there are many other ways in which foreign exchange can be earned or spent. These are collectively called invisible trade which accounts for a quarter of all transactions with foreign countries can be worked out. This is called the balance of payments.
Transactions which bring money into the country are called invisible exports and can be of several kinds.
1. Payment for financial services including insurance, banking, brokage, and other services carried out on behalf of foreigners.
2. Payment of transport services such as shipping or air transport of passengers or freight. Britain and certain other European countries have large invisible earnings in these two fields because of their importance in trade and financial dealings.
3. Expenditure by foreign tourists. This is often an extremely important source of foreign exchange.
4. Interest and dividends on foreign investments. India is earning a substantial amount in the form of interest and profit on foreign investment, annually.
5. Remittance from emigrants. Many emigrants send money to their families and thus countries like India, which have supplied large number of emigrants, may receive considerable foreign exchange in this way.
6. Loans and aids from foreign countries or international organisations. Many underdeveloped countries receive aid or loans to finance development, while other countries may obtain loans to cover balance of payments deficits.
Transactions which take money out of the country are called invisible imports. Payment for services, payment of interest on investments, remittances of immigrants, repayment and interest of foreign loans, or deficit on tourism, may all be greater than invisible exports in the same fields.
When these invisibles, both exports and imports, are brought into account, many countries w hich would have an unfavourable balance of trade are found to have a more favourable balance of payments. It is much more important that the total payments and receipts rather than the visible trade, should be well balanced as long-term loans may have to be obtained, which may lead to future difficulties when they have to be repaid; or gold reserves may be reduced; or overseas assets may be sold so that longer-term invisible exports are reduced; or currency values may be changed by devaluation or revaluation to alter the relative value of exports and imports and thus balance total transactions more nearly.
All these measures may have detrimental effects on the economy in the long term but have to be resorted to by many countries. Other ways of balancing transactions are to increase visible or invisible exports, or to apply trading restrictions in order to cut down on imports. Countries may also reduce the mobility of money, restrict tourism, or confiscate foreign property to reduce the outflow of money.
experts on Trade Policy.
(x) Activating our Embassies as key players in our export strategy and linking our Commercial Wings abroad through an electronic platform for real time trade intelligence.